Citizen panel looks at tax exemptions

Pulp-and-paper companies, large banks and other interest groups already are lining up at the Capitol to defend against possible changes in their favorable tax rates next year.

A citizen commission that reviews tax preferences every year began looking last week at a legislative auditor’s report, which identified one exemption that should be terminated and two that should be left to expire in June 2013.

Included is a $3.2 million break for companies such as timber mills that use waste wood, or “hog fuel,” to generate steam, heat, biofuel or electricity. The report, by the Joint Legislative Audit and Review Committee, said 18 facilities use the fuel and at least seven companies sell it, but the tax break should lapse because it had a sunset date written into it and no criteria to prove its value.

That drew fire last week as the Citizen Commission for Performance Measurement of Tax Preferences took its first look at the audit committee’s recommendation. Lobbyists from Longview Fibre, the Washington Forest Protection Association and the Northwest Pulp and Paper Association showed up to point out that legislative intent can be hard to define and that lawmakers were not actually intending to end the tax break.

“If it was intended to expire and go away completely, that is news to me,” testified John Ehrenreich, a tax-policy expert for the timber-backed forest protection group. Ehrenreich said he actually wrote the original bill before it was merged with other tax breaks into a larger renewable energy bill in 2009.

Ehrenreich acknowledged that the hog-fuel portion carried an expiration date. But he said that was because the industry was “fully intending to come back in a few years and go through a review process like we’re talking about here” with hopes of retaining it.

Commission chairman William Longbrake, a former bank executive, said Ehrenreich and others can further “educate” his committee at its Sept. 23 hearing in Olympia.

That hearing is scheduled barely a week after the state receives its next revenue forecast on Sept. 15, and bad news is widely expected that would require deeper budget cuts. And that will give lawmakers fresh reasons to look for tax exemptions they can close.

Also on tap at the September hearing are 14 tax breaks that the audit committee recommends be continued, two it recommends to let expire and eight more that need review and clarification.

Among them:

• A $40.8 million tax break for purchases of machinery and equipment that are used to create renewable energy. The committee recommended letting it expire, finding lawmakers intended the break to be temporary and offered no criteria for judging its performance.

• A $299 million tax break for jet fuel. The committee recommends it be reviewed and clarified because some exempted companies actually benefit from it.

• A tax break worth $30.5 million over two years for meat slaughtering, which benefits 218 processors and wholesalers, according to the committee, which recommends clarification.

The tax break dates to 1967. After a state Supreme Court ruling extended it to canned meats, which lawmakers had never intended, the Legislature closed that part of the exemption in 2010. But voters promptly repealed that change last fall – in effect returning the unintended tax break to meat processors – by passing Initiative 1107 (the $16 million campaign to repeal the soda pop tax that also targeted the meat tax).

• The only tax break that the committee recommends to terminate is one that deals with an out-of-state tax exemption for items repaired in Washington. But that one has virtually no tax costs at all, because a national “streamlined tax” agreement already prevents taxes in most instances.

• A $172 million tax break on mortgage-interest earnings of banks also is identified for clarification and review. The break mostly helps out-of-state banks and has been the target of Democratic lawmakers and labor unions. The committee found “no conclusive evidence that the deduction increased loan availability or decreased loan costs in Washington.”

Denny Eliason, a contract lobbyist whose clients include the Washington Bankers Association, attended last week’s tax panel meeting and said in an interview that he intends to testify next month in support of the mortgage-interest tax exemption.

Eliason brought up a point often forgotten by critics. The Legislature’s tax package in 2010 almost doubled the industry’s tax payments in Washington, but the banks did not fight it.

Eliason asked what other industry has been willing to accept higher taxes during the recession.

Eliason also said repealing the interest earnings exemption for first mortgages (including second homes) would harm consumers by raising mortgage costs that national and in-state lenders would pass on.

Critics including Rep. Laurie Jinkins, D-Tacoma, dispute that claim, arguing that Washington’s lending rates mirror those of the region despite already having the tax break.

Andy Nicholas, a tax-policy expert at the left-of-center Washington State Budget and Policy Center, wrote a briefing about the committee tax review and said he thinks the bank tax should be repealed, based on the committee’s own finding.

“I think it is a wasteful preference. … If the purpose of the preference is to stimulate housing or to help with the costs of purchasing housing, it is a poor mechanism for doing so,” Nicholas said Friday. “Certainly most of the benefits flow out of state.”

Nicholas thinks a tax break for out-of-state shoppers from low-sales-tax states also should be repealed. Businesses in counties bordering Oregon have claimed they would have to lay off staff if they did not have cross-border visitors who can avoid paying the sales tax, but Nicholas said there is no proof.

Others lined up last week for fights that lie over the horizon.

Bill Stauffacher, a contract lobbyist representing the Northwest Pulp and Paper Association, told the committee that the industry wants to help clarify what was meant by the hog-fuel exemption. He said job retention and economic anxiety also played into the drafting of the bill in 2009 and that kind of rationale is hard for the audit committee to put into its financial analyses.

“What in some ways is unsaid here is that lawmakers really rely on a political calculus as much as any data. The political calculus frankly is built on hope and fear,” Stauffacher said. “When they do something, at least for the pulp and paper industry and this issue, they hope that by providing this kind of tax policy that then (mills) stay open, and they have a fear if the policies don’t get passed or the policies don’t work that we close the doors and a lot of people are out of work. We have that same hope and fear.”

Adam Glickman, spokesman for the Service Employees International Union 775 Northwest, said the audit reviews and tax committee work may offer valuable information about specific tax breaks. But he said the commission’s work is flawed, because it never looks at the tradeoff between special interests that gain from tax breaks and the essential health and education programs that would get funding if the tax breaks were repealed.

Glickman said the commission “essentially … has no teeth.”

“Obviously, as we head into another legislative session or even a special session where legislators are going to talk about even more cuts to education, to health care and to services for the elderly and disabled, these questions about these tax breaks have to be on the table,” Glickman said. “You have to weigh the break for out-of-state-shoppers against funding for the Basic Health Plan or health care for seniors.”

On that, surely more will be said in September, October and the rest of the year – by both sides in the great tax debate that still is coming.

Brad Shannon: 360-753-1688
bshannon@theolympian.com
www.theolympian.com/politicsblog